Small and medium sized businesses in New Zealand have access to a range of funding solutions to secure working capital.
Two popular options – Invoice Finance and overdraft facilities – both offer flexibility and are designed to meet working capital needs.
But which of these two funding solutions is right for your business? In this article, we’ll explore the advantages of each option to help you decide which one best suits your business.
Invoice Finance vs Overdraft Facilities – what is the difference?
Invoice Finance
Invoice Finance is a great solution for SMEs needing flexible and reliable access to working capital, especially considering that approximately 50% of small businesses in New Zealand cite late payments as a major challenge.
Invoice Finance is actually a category of financing that includes several different types of facilities. It is useful in bridging cash flow gaps that tend to arrive when your business is waiting for customers to pay an invoice.
For businesses wanting access to their owed working capital as quickly as possible – rather than waiting the typical 30 days in New Zealand – they can submit their invoices for financing and receive a cash advance of up to a percentage of the invoice value upfront. Once the invoices are paid, the business receives the remaining balance, minus any fees.
Invoice Finance allows your business to choose which unpaid invoices it wishes to submit for funding, allowing you more control and greater flexibility over how much working capital you need access to.
Types of Invoice Finance
There are two main options for Invoice Finance. They differ in how the facility is structured and how the collection of outstanding invoice payments is managed.
In one option, your business remains responsible for collecting payments from your customers. This keeps the responsibility within your accounts receivable department and allows you to maintain confidentiality about the funding arrangement.
The other option involves the third-party finance provider handling the collection of payments from your customers. While this relieves your business of the collection duties, it may come with higher service fees and reduced confidentiality.
Overdraft Facilities
Overdraft facilities serve as a credit facility allowing businesses to withdraw funds even when their account balance is zero, providing essential cash flow when access to working capital is limited.
In essence, the lender establishes a pre-agreed overdraft limit and businesses can access funds up to that threshold. While there may be fees associated with the facility, interest is only charged on the amount used.
Unlike Invoice Finance, which is secured against unpaid invoices, overdraft facilities are commonly secured by collateral such as real estate or business assets. However, some financial institutions also offer unsecured business overdrafts, providing additional flexibility for companies in need of short-term funding solutions.
At ScotPac, we offer business loans – both secured and unsecured – for those SMEs needing access to working capital faster than they would otherwise get through Invoice Finance or another financial facility. Click here to learn more about our Business Loans.
Choosing Between Invoice Finance and Overdraft Facilities
Invoice Finance and overdrafts are both used by small and medium sized businesses needing access to working capital, needing to smooth over cash flow gaps, and needing injections of capital to fund ongoing growth.
The best funding facility for your business will depend on your needs, industry, cash flow management and business objectives. We recommend consulting with our team of lending specialist here at ScotPac so that you can receive a tailored solution that fits your needs and goals.
Why choose Invoice Finance?
Invoice Finance is often the better option if you are a fast-growing business. These facilities can help keep up with one’s cash flow needs, are scalable as the value of your invoices grows, and ensures that ongoing capital is accessible. Plus, it has less strict eligibility criteria than overdraft facilities.
Why choose Overdraft Facilities?
For more established and larger businesses looking for a financial safety net, a more traditional overdraft facility could work well. Much like conventional business loans, overdraft facilities are useful for companies with strong credit histories, or available assets to serve as security and bring down interest rates and fees.
Analysing The Advantages of Invoice Finance and Overdrafts
Flexibility
Invoice Finance
Invoice Finance is a highly flexible. Your business can access tailored funding based on the invoices you choose to finance and offers various debt collection options that let you retain complete control.
Overdrafts
An overdraft facility can provide adequate flexibility for many businesses but there are restrictions in how much capital can be accessed and does often come with costly fees and interest.
Speed
Invoice Finance
Invoice Finance is relatively quick and simple to set up. At ScotPac, we leverage technology for a more streamlined application process, minimal eligibility checks and less paperwork than other lenders.
Overdrafts
Overdrafts and business loans both offer quick access to cash, though the application and eligibility checks can be more comprehensive. However, once the facility is approved and set up, access to funds is immediate.
Credit Limits
Invoice Finance
With Invoice Finance, access to working capital is limited by the value of your invoices. The more invoices you issue and submit for financing, and the higher the value of those invoices, the greater your credit limit.
Overdraft
Business overdrafts can range quite widely in New Zealand and can be secured or unsecured. Some unsecured overdraft facilities are as limited as $5,000 while others, backed by assets as security, can exceed $500,000. Credit limits can vary depending on your credit rating, trading history and asserts.
Time Horizon
Invoice Finance
If you are looking for a medium to long term solution for ongoing access to reliable working capital, Invoice Finance is the right option. It is a scalable funding facility that can grow along with your business and your needs.
Overdrafts
Overdraft costs are included in your facility’s initial terms but only incur an interest fee on any withdrawn funds below a $0 balance. There may also be one-off set-up fees or ongoing account management fees depending on the lender. Depending on how much working capital you intend on accessing and over how long a period – which can affect interest charged – overdrafts can be a helpful solution.
Collateral
Invoice Finance
With Invoice Finance, there is no need to put up an asset, such as your home, as collateral. The invoices submitted for finance secure the loan and act as collateral for the cash advance. Some lenders will require a personal guarantee, however.
Overdrafts
Overdraft facilities come in both secured and unsecured arrangements. Depending on the nature of your arrangement and financial facilities, you may also be able to provide a personal guarantee, as with Invoice Finance.
Accessibility
Invoice Finance
Invoice Finance is a highly accessible funding facility. For small and medium sized businesses without the extensive or stellar credit rating, this can be a great option for getting access to the cash owed to you tomorrow, today.
Overdrafts
Overdraft facilities tend to have stricter lending criteria. This makes it a good option for businesses with trading histories and good credit ratings – along with collateral for secured arrangements – but less accessible for smaller enterprise.
Key Takeaways
In summary, while both Invoice Finance and overdraft facilities can be useful funding solutions for your business, they are also distinct.
Ultimately, Invoice Finance unlocks the money already owed but inaccessible to your business while an overdraft facility provides a line of credit for access to cash beyond your current account balance.
- Invoice Finance is generally more flexible and easier to set up, especially for small and medium-sized businesses, as it requires no security and fewer eligibility criteria.
- Overdraft facilities are ideal for larger, established businesses that need immediate access to extra working capital.
Make the Right Choice with ScotPac
Why do ScotPac’s clients grow at 3 times the rate of the average business?
Because our lending specialists draw on over 35 years of experience to create tailored funding solutions for our clients.
By unlocking the potential within our clients’ businesses, the ScotPac team helps fuel their growth and success. That’s exactly what we are doing for the 8,500+ clients we support today.
To learn more about how Invoice Finance can help your business, the associated costs of an overdraft facility, or the types of business loans we offer, contact our lending specialists today or submit an enquiry using the form below.
